Japan voices concern over potential tariffs

The Japanese government and businesses are closely monitoring the potential impact of the US government's decision to impose punitive tariffs on major trading partners and expressed deep concerns about being a new target of possible tariffs.

Although Japan has so far not been slapped with punitive tariffs, major Japanese companies, especially in the automobile sector, are worried as they either have factories in Canada or rely on Mexico as a key part of their supply chain for the US market.

Their comments came as Japanese Prime Minister Shigeru Ishiba departed from Tokyo on Thursday for a visit to the United States, and he will hold his first in-person meeting with US President Donald Trump in Washington, DC.

Trump signed an order on Saturday, imposing a 25 percent additional tariff on imports from Canada and Mexico and an additional 10 percent on imported Chinese goods. He paused the planned tariff hike against Mexico and Canada for a month but the levies against China took effect on Tuesday.

On Sunday, Japanese Finance Minister Katsunobu Kato expressed deep concern over the possible repercussions on the global economy. He emphasized the importance of closely monitoring foreign exchange movements and the US monetary policy outlook.

"We must carefully evaluate how Japan could be specifically affected and take necessary measures in response," Kato said, alluding in part to inflation concerns stemming from the steep tariffs imposed by the Trump administration.

At a news conference on Monday, Chief Cabinet Secretary Yoshimasa Hayashi addressed the potential impact of Trump's announced tariffs, stating the government will "thoroughly assess the situation and respond appropriately".

Ken Kobayashi, chairman of the Japan Chamber of Commerce and Industry, warned these tariffs are highly likely to have a negative impact on Japan's economy.

Among Japanese automakers, Toyota, Honda, Nissan, and Mazda have manufacturing operations in Mexico, while Toyota and Honda also operate plants in Canada, exporting vehicles to the US.

According to Japan's Ministry of Economy, Trade and Industry, Japanese subsidiaries in Mexico and Canada generated approximately 11.8 trillion yen ($77.6 billion) in revenue during the 2022 fiscal year, with around 60 percent coming from the transportation machinery sector, including automobiles.

Hirohisa Akahira, director of the Research & Information Services Department at the Japan External Trade Organization, or JETRO, New York, emphasized in a research note that when assessing the impact of Trump's tariff policies on Japanese businesses in the US, it is equally important to monitor tariffs on Mexico. Many Japanese companies, particularly in the automotive sector, rely on Mexico as a key part of their supply chain for the US market.

Currently, more than 1,300 Japanese companies operate in Mexico, making it a crucial manufacturing hub for exports to the US. Akahira said that for Japanese businesses, trade policies affecting Mexico could be just as significant as those targeting Japan.

GDP decline

According to estimates from the Daiwa Institute of Research, Japan's real gross domestic product could decline by up to 1.4 percent in two to three years following the implementation of additional tariff measures targeting Canada, Mexico, and China.

In response to Trump's newly imposed tariffs, Japan's Ministry of Economy, Trade and Industry established a dedicated consultation desk on Sunday in collaboration with JETRO to support affected businesses. The desk will offer individual assistance via phone and online inquiries. JETRO's offices in the US, Canada, Mexico and China, along with its 49 domestic offices, will coordinate efforts to gather information and provide business support.

Japan is also assessing the possibility of facing new tariffs from the US as Trump has indicated no country is exempt from his trade-war tactics.

Akahira highlighted trade deficits and defense spending as key factors influencing which countries might be targeted by Trump's tariff policies.

On Wednesday, the US Census Bureau and the US Bureau of Economic Analysis said that the US goods trade deficit with Japan reached $68.5 billion, making it the eighth-largest in the world.

Export analyses suggest that despite being a US ally, Japan could still possibly face new tariffs under Trump's policies.

Takahide Kiuchi, executive economist at the Nomura Research Institute, warned that Japan is highly likely to face additional tariffs sooner or later in some form.

He said that Trump has announced plans to impose tariffs as early as mid-February on imports of semiconductors, pharmaceuticals, steel, aluminum, copper and oil and natural gas, with a strong possibility that Japan will be among the targeted countries.

He urged the Japanese government to collaborate with Europe and other nations to counter the "America First" policy and prevent further expansion of US tariffs on a global scale.

Regarding whether companies with operations in Mexico and Canada will shift processes like assembly to US factories, Hideo Kumano, chief economist at the Economic Research Department of Dai-ichi Life Research Institute, said some may attempt to do so, but higher labor costs in the US will make relocation impractical for many.

The businesses will weigh the cost increases from Trump's tariffs against the potential cost of relocating production to the US and make decisions accordingly. Either way, Japanese companies stand to gain nothing. A decline in sales at local factories will only further worsen profits, Kumano said.